A model for strategy

[This post is part of a series on “Mental models and beliefs: an exercise to identify yours.” If you don’t see a Table of Contents to the left, click here to view the series, where you’ll get more value than reading just this post.]

Strategy is a fundamental study for many fields, including leadership, military, games, and plenty areas of business. If you’re reading this page, you don’t need motivation to understand its value.

I’ve read a bunch on strategy, taken classes, written a book on strategy and North Korea, and lived through my share of strategic situations. I play chess decently too.

A model for strategy: Strategy begins with the sustainable competitive advantage.

You’ll have to read the book for its thorough treatment of the concept, but I consider it worth it to understand the most fundamental concept to strategy.

The book points out that one consideration dominates all others in business strategy — do you have a sustainable competitive advantage.

What is a sustainable competitive advantage? The name describes this critically important concept, but it can take a while to nail it. Many people consider things sustainable competitive advantages that aren’t sustainable or competitive — a first-mover advantage and differentiation come to mind. The book shows how the former is not sustainable and the latter is not a competitive advantage, with advantages from history.

In short, a sustainable competitive advantage means that new entrants to the market have a disadvantage relative to incumbents. There aren’t that many sources of sustainable competitive advantages — supply (privileged access, proprietary technology protected by patents or experience), demand (psychological or actual costs of switching – includes branding, loyalty programs, laborious setup and coordination issues), and scale economics.

Once you understand this concept, you realize that if you’re competing in a market where no one has a sustainable competitive advantage, no matter what advantage anyone starts with, eventually everyone will compete on efficiency. Everyone will have the same strategy — to improve efficiency (or to find a sustainable competitive advantage to change the playing field).

If only you have a sustainable competitive advantage, your main strategy is to keep it. If someone else does and you don’t, you’re best strategy is to exit the market. If multiple players have sustainable competitive advantages, strategy can be complex, involving things like game theory.

This decision tree, from chapter 1 of the book, illustrates the initial strategy for all companies in competitive markets and many situations outside competitive markets.

The main decision tree for all strategy in business (and many other places), beginning with the question of if you have a sustainable competitive advantage (from Greenwald and Kahn)

Strategy

Read the book and learn the concept of the sustainable competitive advantage. Briefly,

If you have a sustainable competitive advantage and none of your competitors do, keep it. If you don’t and they do, consider leaving the field. If no one does, focus on efficiency and don’t bother spending on anything else.

When I use this belief

I use this belief in competitive situations. I wouldn’t consider starting a firm or investing resources in one without understanding its competitive environment from this book’s perspective.

What this belief replaces

This belief replaces more complicated theories on strategy, like Porter’s Five Forces, for example, with a simple model.

Where this belief leads

This belief leads to competing more efficiently and effectively.

Learn to make Meaningful Connections

with a simple, effective exercise from my book, Leadership Step by Step.